THE LIE BEHIND THE PLY How European and Chinese EIA US PO Box 53343 businesses traded 100,000 tons Washington DC 20009 USA T: +1 202 483-6621 of problematic plywood E: [email protected] eia-global.org CONTENTS

Executive summary 1

1. Arser’s Emergence as a Top 3 International Plywood Brand 1.1 Transformation of China’s Plywood Industry 3 1.2 From a Tropical Logs Deficit to the Emergence of a Global Supply Chain 5 EXECUTIVE SUMMARY 1.3 Business Consolidation and the Birth of Arser as a Top International Brand Name 6 1.4 Europeans Buy from Arser 9 A seven-year investigation by the Environmental Investigation Agency (EIA)—revealing one of the 2. Kolombangara Cover and Apparent 12 largest violations of the European Union Timber Regulation (EUTR) ever reported—exposes a tainted FSC fraud supply chain connecting the threatened tropical forests of Oceania to manufacturing hubs in China 2.1 Arser’s Claim 12 and to consumers in Europe. EIA’s investigation shows that European companies may have imported 2.2 Mass Balance Gap 15 thousands of tons of tropical-faced Chinese-made plywood with a high risk of being illegal, in 2.3 Inconvenient Origin 19 apparent breach of their due diligence obligation under EUTR. An opaque supply chain enabled this 2.4 Inflated Volumes and Potential Fraud in FSC 21 multi-year violation of the EUTR. The manufacturer of the tropical-faced high risk plywood in this investigation, Jiangsu High Hope Arser Co. Ltd. (“Arser”), is the largest exporter of plywood in China 3. Diligent Failure: the Role of the 22 and a state-owned foreign trade enterprise. EIA’s findings indicate that Arser appears to have lied European Companies about the origin of the tropical timber used in the plywood exported to Europe and appears to have 3.1 Chinese Plywood on the Radar 23 falsely claimed it was certified by the Forest Stewardship Council (FSC), for several years. 3.2 Yes We Can: Address Quality Control Issues 25 3.3 Yes We Can: Ignore Legality Risks 26 EIA’s research indicates that Arser’s seemingly false claim, which some European importers appeared 3.4 Yes We Can: Accept Untrustworthy Documents 27 3.5 Yes We Can: Cover Up Potential Fraud 28 to know and may have covered for, applied between 2016 and 2018 to an estimated 100,000 tons of plywood imported directly into Belgium, Germany, Netherlands, and the United Kingdom (UK). But 4. Conclusion and Recommendations 29 the problem is likely much bigger. According to EIA’s investigation, Arser began selling this tropical face plywood product to Europe at least as early as 2014. Moreover, the number of countries and List of figures and boxes 31 consumers affected is greater, since Arser’s importers are large distributors who sell to several European countries, including France and Ireland. As of February 2021, Arser’s tropical face plywood Annexes 32 may still be sold in Europe under such brands as Starplex. European and Chinese authorities must join forces in order to stop their consumers and industries from driving the plunder of some of the last References 37 tropical forests in Papua New Guinea (PNG) and Solomon Islands. EIA uncovered systemic problems of opacity, likely fraud and cover-up in the tropical-faced plywood manufacturing sector in China, and its connections to European markets. ACKNOWLEDGEMENT The document has been produced with financial assistance from Norway’s International Climate and The global market for plywood is projected to reach exterior face. Pencil cedar (Palaquium spp.)-faced Forest Initiative (NICFI), Good Energies Foundation, and the Tilia Fund. The contents of this publication 223.4 million cubic meters annually by 2022, driven by plywood in particular has been widespread in many are the sole responsibility of EIA US and do not necessarily reflect the positions of any donors. recovering construction activity worldwide. This is European markets. partly due to the rise in high-value, high-rise EIA US contacted the entities in the report, and incorporated responses received prior to the time construction projects; and a reliance on plywood in For years, Arser has been China’s largest single of publication. interior design, especially of floors, ceilings, and walls.1 exporter of plywood to the world, as well as to Europe. A manager for Arser told EIA investigators in 2018 that European countries import enormous quantities of his company exports nearly half of its 600,000 cubic ABOUT EIA plywood products from around the world. Plywood was meters of plywood production to Europe, equivalent to 5 We investigate and campaign against environmental EIA US Unless otherwise noted, the the fifth largest type of timber product imported into approximately 500-600 containers per year. Arser has crime and abuse. Our undercover investigations sources for the report are EIA’s Europe (including the UK) by value between 2015 and supplied many kinds of plywood to its European PO Box 53343 expose transnational wildlife crime, with a focus on internal investigative reports, 2019.2 In 2018 alone, European Union (EU) countries customers. EIA’s investigation focuses on one of its Washington DC 20009 elephants and tigers, and forest crimes such as illegal photos, audio and video evidence imported US$4.7 billion worth of plywood, of which signature products: a panel allegedly made with face logging and deforestation for cash crops like palm oil. USA collected during the investigation. 12 percent - the largest share - came from China.3 This and back veneers of FSC-certified pencil cedar. We work to safeguard global marine ecosystems by T: +1 202 483-6621 addressing the threats posed by plastic pollution, trade is also significant for China: for the past decade, According to Arser’s claim, 100 percent of the pencil bycatch and commercial exploitation of whales, E: [email protected] © Environmental Investigation Agency, plywood has been China’s second largest wood product cedar on this product and sold to European importers Inc. 2021. dolphins and porpoises. Finally, we reduce the impact eia-global.org export to Europe, just after wooden furniture.4 EIA’s has been made from FSC-certified pencil cedar logs of climate change by campaigning to eliminate powerful refrigerant greenhouse gases, exposing All images © Environmental investigation has focused on products commonly originating from one of the only FSC-certified related illicit trade and improving energy efficiency in Investigation Agency, Inc. unless referred to as “red-faced” plywood, which use a “red” concessions in Oceania: the Kolombangara Forest the cooling sector. Design: www.designsolutions.me.uk otherwise stated. veneer traditionally made of tropical trees for their concession in Solomon Islands.

Environmental Investigation Agency THE LIE BEHIND THE PLY 1 1

Through multiple discussions with Arser’s employees, including corporate representatives and salespeople and EIA recommends: ARSER’S EMERGENCE AS A TOP Arser factory managers, and other industry sources, EIA concludes that the volume of FSC-certified pencil-cedar To regulators in the EU and UK* INTERNATIONAL PLYWOOD BRAND plywood sold by Arser to its European customers was at l Investigate and, as appropriate, prosecute under the least 20 times higher than the quantity of plywood that EUTR and UKTR the European companies that have can be manufactured from the limited volume of pencil imported high risk pencil cedar-faced plywood cedar logs produced and exported out of the without adequately mitigating identified risks. In the space of two decades, China has transformed from continued to multiply, increasing from 21 million to 113 one of the largest importers of plywood in the world to million cubic meters, an average annual growth rate of Kolombangara Forest concession. These findings l Recognize the high risks associated with the import suggest that over 95 percent of the volume imported by of plywood made in China using imported tropical its largest manufacturer and exporter. This achievement 34 percent. In 2016, China alone represented nearly 9 Arser’s European customers between 2016 and 2018 did timber and increase the controls on imports of has relied on many factors, including the emergence of 75 percent of the global production of wood based panels. not come from the Kolombangara island concession as these products. plywood supplier brand names, like “Arser,” which Plywood is now China’s second most important value- offered European clients the promise of more reliable, added wood product export (by value) after furniture.10 claimed, but from other logging areas, most likely PNG l Increase EUTR enforcement with the issuance of orSolomon Islands, and possibly including United adequate penalties in order to effectively deter simple and direct supply chains. EIA’s investigation Nations Educational, Scientific and Cultural Organization illegal imports. reveals that despite Arser’s claims, the company’s As Chinese production boomed, the international (UNESCO) World Heritage protected areas—all of which plywood supply chain remains largely opaque and plywood production centers migrated primarily from are considered high risk under the EUTR. To regulators in China untraceable. Over the course of its investigation, EIA North America and Southeast Asia to four Chinese l Expand administrative and law enforcement efforts found that many of the problems uncovered in Arser’s provinces: Hebei, Shandong, Jiangsu and Zhejiang.12,13,14 related to the plywood industry and its supply supply chain are present throughout the industry. China flipped from being a wood-based panels importer EIA’s investigation further shows that several major chains to address legality issues, such as document to becoming the largest exporter in the world in less than European importers, including Altripan NV (Belgium), fraud. 15,16 Meyer Timber Ltd. (UK), International Plywood (UK), and 1.1 Transformation of China’s a decade (Figure 2). The US and Europe quickly became l Leverage the drafting phase of the Forest Code the two largest markets for Chinese plywood (Figure 3). Sakol BV (Netherlands) appeared to be aware that their implementing regulation to establish mechanisms Plywood Industry supply chain carried unmitigated risks under EUTR. In that will protect China’s plywood industry from the The first Chinese timber production facilities were state- their statements to EIA investigators, these importers import of illegal timber. Until the mid-1980s, Chinese plywood was produced by state enterprises in forested regions using locally felled owned, the operation of which relied heavily on state expressed doubts regarding their products’ claimed 17 l resources. Beginning in the 1980s and through the origin, legality, opaque supply chain, and about the As proposed in Article 65 of the revised Forest Code, wood, and consumed mainly in Beijing, Shanghai, and establish an effective ledger system in order to hold Tianjin. Following new restrictions on domestic logging 1990s, many sectors of China’s economy, including the documents provided to them by Arser. Still, while 18 every entity along the supply chain accountable. timber industry, were liberalized and privatized. acknowledging they had identified risks that were in the 1990s, plywood production shifted to coastal cities located near plantations.7 From the 1990s to the mid- Previously state-run, integrated supply chains became unmitigated, the companies continued to import the To regulators in China, the EU, and UK 19 2000s, supported by export-oriented incentives from the more fragmented, dispersed, and informal. As plywood tropical-faced plywood from Arser. l Use existing platforms, including the EU-China Bilateral Coordination Mechanism, to develop a central government and growing demand at home and factories grew and developed, so did many small, often pilot project focused on enhancing tropical-faced overseas, the industry experienced very rapid growth.8 family-run mills to supply them with veneers, forming When contacted by EIA, Altripan NV, International plywood trade legality, transparency and China became the largest wood-based panel producing clusters in Jiashan County (Zhejiang province), Wen’an Plywood, and Meyer denied placing this product on the traceability. country in the world, surpassing Indonesia in 2000 and (Hebei province), Linyi (Shandong province), and Pizhou market with known, unmitigated risks. Altripan stated 20 the United States (US) in 2003 (Figure 1). Between 2003 (Jiangsu province). These industry clusters facilitated “Altripan purchased the pencil cedar plywood in the l Increase trilateral coordination regarding the control and regulation of China–EU and China–UK and 2015, China’s wood-based panel production “continuous plywood production lines, obtaining belief that the risks had been mitigated by the FSC plywood supply chains containing imported and certification process, with the EUTR requirements being tropical wood. met by the additional due diligence assessments.” Meyer China stated “There was not any indication that the company’s To timber industry actors in the EU and UK l approach to due diligence was not in complete Consider all tropical-faced plywood manufactured in 100 USA China to have unmitigatable risks and do not import Indonesia compliance with the EUTR.” International Plywood it until China implements a robust transparency stated, “We as a company do everything that is mechanism that makes it possible to trace timber 50 Malaysia practically possible to confirm the source of every materials from source to product. Japan product that we import.” Sakol did not respond to an opportunity to comment. A representative from Arser To FSC l Implement immediate actions to stop systematic 20 informed EIA that the company ceased to import the fraud among FSC-certified companies in the pencil cedar logs from the certified Kolombangara Chinese plywood manufacturing sector, focusing 10 concession in February 2020.6 on supply chains that involve tropical timber and global manufacturers. 5 The particular supply chain presented in this report l Require transparent digital tracking and reporting provides a glimpse into the current risks associated with of all sales of FSC-certified wood products to the tropical-faced plywood global supply chains. In prevent double-counting, from the stump to the Volume (cubic meters, thousands) recent years, while direct log export to Europe from high- final consumer. 2 risk countries has diminished, indirect routes via manufacturing hubs such as China, Vietnam and * As of January 1, 2021, as a consequence of Brexit, Great Britain 1 Cambodia have proliferated, making illegal and high-risk (England, Scotland, and Wales) is no longer subject to the EUTR. The 2011 2015 2013 2017 1997 2012 2016 2018 1998 2019 1999 2001 2010 2014 1996 2005 2003 2006 2007 2002 2008 2009 2000 regulation in force for Great Britain is the United Kingdom Timber 2004 timber flows increasingly opaque and often impossible to Regulation (UKTR). Businesses in Great Britain importing timber from trace. In order to rise to the challenge, authorities from outside of the UK must carry out due diligence according to the same Source: EIA, based on International Timber Trade Organization (ITTO) data principles as laid out in EUTR (see Box 5, the Due Diligence Process). China, the EU and UK must combine stronger law Source: Forestry Update UK Timber Regulations.” Accessed April 15, enforcement with adopting effective systems for 2021. https://www.sgs.co.uk/en-gb/our-company/about-sgs/sgs-in- Figure 1 brief/sgs-in-united-kingdom/sgs-services-and-brexit/forestry-update- 11 transparency and traceability. uk-timber-regulations. Evolution of the production of wood-based panels by the top five producer countries, in volume

2 Environmental Investigation Agency THE LIE BEHIND THE PLY 3 financial investment, achieving wood-use and in large parts of the country.27 Government incentives Flow 21 11 operational efficiency,” as well as economies of scale. including tax rebates for processed wood exports such as Exports Quantity By 2013, there were an estimated 3,000 mills equipped plywood and zero tariffs on log imports further promoted with a plywood production line and tens of thousands of the timber export industry.28 The growing export- 10 Imports Quantity veneer-peeling mills in China.22 Throughout the course of oriented plywood industry faced a widening deficit of 29 9 its multi-year investigation, EIA investigators observed raw material. In order to fill the gap, the Chinese the highly fragmented industry in the Chinese plywood plywood industry turned toward the import of tropical 30,31,32 8 sector (Figure 6). roundwood from overseas.

7 1.2 From a Tropical Logs Deficit As shown in Figure 4, Chinese companies have imported ever-growing volumes of tropical hardwood logs in the past 6 to the Emergence of a Global two decades. This trend will likely increase in order to fuel Supply Chain the projected increases in production by 34 million cubic 5 meters of plywood and hardwood sawnwood by 2030.33 The rapid expansion of China’s plywood industry in the 4 early 2000s relied on the parallel development of its Responding to growing demand and economic “fast-growing, high-yield” tree plantations. To ensure a incentives, a global supply chain spanning multiple 3 supply of raw material for the industry, the Chinese Volume (cubic meters, thousands) continents emerged. This chain begins with harvesting government created 13.3 million hectares of plantations - hardwood trees and exporting the logs from tropical 2 especially poplar (Populus spp.) and eucalyptus countries to China, processing those logs along with 23 (Eucalyptus spp.). These domestic plantations proved domestic plantation trees into plywood in China, and 1 adequate for the production of the core layers of the exporting the finished plywood products to European, plywood products (see Box 1 for a description of a typical US, and other global markets.35 The source and species of 0 plywood product structure). However these plantation tropical timbers used by the Chinese plywood industry species were not suitable for use as visible veneers has shifted in response to availability of raw materials as 2011 1991 2015 1995 2013 1993 2017 1997 2012 1992 2016 2018 1998 2019 1999 2001 2010 2014 1994 1996 1990 2005 2003 2006 2007 2002 2008 2009 2000 2004 applied to the face and back of the plywood panels. To well as market barriers. Popular species have ranged meet that need, the industry would require other species, from Southeast Asian lauan (Shorea spp.) in the 1980s36 24 including imported tropical hardwood. to West African okoume (Aucoumea klaineana) in the Source: EIA, based on ITTO trade data 1990s37, sapele (Entandrophragma cylindricum), and a Over time, Chinese companies became increasingly variety of species from Oceania including bintangor Figure 2 reliant on imported timber. The 1998 Natural Forest (Calophyllum spp.) and pencil cedar.38,39,40,41,42 Import versus export of plywood in China, by volume Protection Program restricted logging of domestic forests

BOX 1. 18 PLYWOOD ANATOMY25,26

16

14

12 UK

10

8

6

Other EU Volume (cubic meters, millions) 4

2

0 United States EU-28 Japan South Korea United Arab Emirates

Source: EIA, based on Global Trade Atlas

Figure 3 Main importers of Chinese made plywood, by volume (2000-2013)

4 Environmental Investigation Agency THE LIE BEHIND THE PLY 5 faced plywood back to the log imported in China. Several about a log’s origins is often lost early in the process of Product aspects explain the opacity of the sector. First, multiple plywood manufacturing. In most cases, when logs are Ind. roundwood (NC.T.) trading layers and middlemen often separate the purchased at the port by traders or veneer mill agents,

12 importers of tropical logs from the veneer mills that they do not come with concession of harvest documents will peel them. The majority of the peeling mills which or logging authorizations, or other such documents supply the veneers to plywood manufacturers are small, serving as evidence of their point of origin. One plywood 10 often family-owned enterprises. It is common, EIA factory employee explained to investigators that learned during its investigation, for these small mills although he had made special efforts to collect not to be officially registered and for their role in the documents about the origin of the tropical logs used in 8 manufacturing process to remain undocumented. his factory’s products—in order to satisfy European Moreover, plywood factories often outsource orders, clients’ requests—he had been unable to obtain them.53 further adding to the complexity of the trade flows. 6 One plywood factory manager told EIA investigators Multiple sources in veneer mills and plywood factories that his factory outsources to any of 40-50 other explained to EIA investigators that the falsification of factories; according to EIA’s investigation, this is documents is common in the plywood sector. This 4 common practice.51,52 applies to at least two types of documents. One type are

Volume (cubic meters, thousands) the documents certifying the origin of the timber used in

2 Whenever EIA investigators raised the question of the finished plywood products. Another type are the traceability, they were told that accurate information documents used to prove that the finished plywood product was made of certified timber. Multiple sources in 0 different companies told EIA investigators that their plywood manufacturing company commonly prints fake 2011 2015 1995 2013 2017 1997 2012 2016 2018 1998 1999 2001 2010 2014 1996 2005 2003 2006 2007 2002 2008 2009 2000 2004 FSC labels, uses fake FSC documentation, or provides clients with expired FSC certificates.54 Source: EIA, 2020 based on data from ITTO Between late 2000s and late 2010s, the plywood industry Figure 4 in China experienced shake-ups and consolidation, 34 China’s tropical log imports triggered by both international events and domestic factors.55 The plywood industry, like much of the Chinese economy, suffered from the global financial-economic percent per year, according to Chinese factory workers 56 1.3 Business Consolidation and the 44 crisis in 2008. In 2013 and 2014, the Chinese government who spoke to EIA investigators. These industry Birth of Arser as a Top International revised its Environmental Protection Law and enacted a sources also explained that because these small, often series of laws and regulations to combat many kinds of Brand Name family-run businesses have little capital with which to pollution.57 These efforts focused on eliminating outdated operate on credit, their business model is entirely and heavy polluting factories, eventually impacting Scarce domestic timber resources, rising labor costs, and dependent on fast cash flow turnover. To compete, they timber processing mills (see Box 2 for further details). increased environmental regulation put pressure on the had to cut costs and cut corners. This took a variety of Thousands of wood processing factories closed, many of 43 Chinese plywood sector in the mid-2000s. Amidst a forms, including that they might hire migrant or local which were the smaller veneer mills and plywood global debt crisis, European and North American village labor, assemble the panels with inexpensive, factories that were the least able to meet new consumers, on which the Chinese plywood market was potentially harmful glue, and/or purchase cheap requirements. Larger, consolidated companies could still heavily dependent, were unwilling to absorb higher tropical logs from unknown origins as raw material 58,59 45,46,47 better afford the capital upgrades. prices. Chinese manufacturing inputs were squeezed (Figure 5). from both ends. As an employee from the British In addition, timber-specific policies and regulations were plywood importer Meyer explained to EIA undercover The vast majority of China’s plywood products are made enacted in the main foreign markets for Chinese investigators, European importers played a key role in by small enterprises, which produce low-end products, 48 plywood industry’s products. In fact, as the largely pressuring their suppliers to produce goods at the using simple technology, and compete on price. Their inflexible demand from the EU and the US was pushing absolute cheapest price: supply chains are diffuse and fragmented, involving China’s plywood industry in a race to the bottom, new numerous actors. The factories making plywood are not laws were adopted in these two markets to protect them Meyer: “We all want it cheap because otherwise we vertically integrated and rely on buying veneers, often against the import of illegal timber. The US Lacey Act cannot sell it. But we have created our own problem indirectly, through middlemen, from numerous small was amended in 2008 to include wood products, and the because we have reduced the quality of everything. And veneer producers (Figure 6). From plantation to finished European Timber Regulation (EUTR) came into force in some of our competitors don't necessarily care, but we plywood “this network can involve up to eight separate 49 2013. Under these new laws the concept of due diligence have a big brand in the UK and we have to make the movements or trades and a number of middlemen.” became central to the placement of imported timber into right choices. [...] The UK market is pretty simple: For imported logs, the process involves a network of the EU and US markets (see Box 4 for details in the EU because it is cheap. […] I think the UK just wants it middlemen including customs clearance agents, 50 context). Under the EUTR, European importers are cheap. And because we want it cheap, the wholesalers, and log brokers at the port. EIA required to identify, assess and mitigate the risk of manufacturers have to make quality less because that is investigators found that poor documentation combined importing wood products that were illegally harvested or the only way that they can go.” with this complex chain of custody make it all but traded - a task made more difficult when the supply impossible to verify the end product’s origin and legality. 69,70,71 Figure 5 chain is long, complex and opaque. Faced with these As average production prices increased but export prices Examples of typical small-scale veneer mills and plywood obligations, some European importers likely sought varied little, Chinese plywood manufacturers and veneer EIA investigators found that it is extremely challenging manufacturers in China simpler supply chains involving fewer intermediaries. makers saw profit margins hover around two to three to trace the chain of custody from the finished tropical- In China, the suppliers of plywood who could offer

6 Environmental Investigation Agency THE LIE BEHIND THE PLY 7 BOX 2. “BLUE SKIES,” PAINFUL FOR FACTORIES

In 2013, China’s government enacted the “Air Pollution temporarily or permanently shut down until they could and Control Action Plan,” requiring significant replace their equipment and meet new emissions improvements of air quality and reductions of standards.64 As of 2017, some 11,700 plywood production Particulate Matter (PM) 2.5 for key regions between enterprises in the country’s major plywood 2013 and 2017, such as 15 percent in Pearl River Delta manufacturing zones were shut down at least and 25 percent in Beijing.60 The following March at the temporarily, including nearly half of the 5,800 plywood twelfth National Peoples’ Congress, Premier Li Keqiang factories in Shandong Province (where Linyi is trumpeted the law and a related series of pollution located).65 The shutdown of factories in Linyi, a major controls as the beginning of a “War on Pollution.”61 manufacturing hub for plywood as well as other heavy Emissions- and energy-intensive factories across industries, met with strong resistance.66 many sectors, including plywood factories, were required to shut down or reorganize in order to meet The Air Quality Act has come to be considered one of the new PM 2.5 target.62 The national Environmental China’s most influential environmental policies, and Protection Law was also revised in 2014, leading to the original air pollution action plan.67 It has additional series of policies and emissions standards significantly improved air quality in China. China's aimed at curbing all sorts of pollution across China, three largest city clusters, Beijing-Tianjin-Hebei, Pearl including water pollution, solid waste, and air River Delta and Yangtze River Delta, reached their particulates.63 targets by the end of 2017.68 This success demonstrated the Chinese government’s ability to weather short- These new requirements noticeably impacted plywood term economic challenges and overcome resistance in production and imports from China from 2015 to 2017. the pursuit of positive long-term environmental and Many veneer and plywood mills were forced to social goals.

“Yafei”, renamed “Arser” in 2005. In 2007, the company formed a joint venture with Jiangsu Skyrun Group, and in 2012 Skyrun Group reorganized with Jiangsu High Hope International Group Corporation (江苏汇鸿国际集团 股份有限公司, “Jiangsu High Hope”), founding the company Jiangsu High Hope Arser Co, Ltd. A state- owned enterprise, Jiangsu High Hope is involved in many sectors including trading, real estate, and logistics services.73 The group has consistently ranked among the top 500 Chinese enterprises since at least 2014.74,75,76,77,78 Arser, one of Jiangsu High Hope’s many subsidiaries, specializes in the import of logs and timber into China and the export of processed wood products.79 According Source: Screenshot from Arser’s website to Chinese customs data, in the period 2015-2017, Arser exported 815,000 tons of plywood to 61 countries, Figure 7 72 representing approximately five percent of all Chinese Example of Arser’s carefully crafted public image plywood global exports.80

vertical integration probably became more appealing, as As stated on its website and catalogue, Arser jointly their more direct supply chain would make quality owns five factories in China: Pizhou Arser Merry, Linyi control and due diligence requirements easier. Arser Haode Wood, Huai’an Arser Wood, Pizhou Arser Wood, and Shuyang Arser Tonda Wood.81,82 Altogether, According to EIA’s investigation, Jiangsu High Hope Arser lists 30 branded products and brand affiliations Arser Co. Ltd. (“Arser”) has been one of the prominent including Xtraplex (an International Plywood product), plywood manufacturers and suppliers that distinguished Meyer, Arser Wood, Arserplex, Yafei, Europly, Arserplus, itself for its ability to navigate the changing economic Pukkyply, Q-Ply, Betoplex, Europlex, and Diamondplus.83 landscape globally and adapt to foreign regulatory requirements. The company has presented itself as the sourcing solution for foreign demand, building a well- 1.4 Europeans Buy from Arser Source: EIA, crafted image around concepts like “specialization”, *EIA 2016 and 2018, unpublished investigative material. Yi, Shi. “How Illegally Harvested Timber Is ‘Greenwashed’ in China.” Sixth Tone, January 16, 2019. “well-controlled product quality,” “stable supply,” and European countries import considerable quantities of “honesty” (Figure 7). plywood from around the world, and China is its second largest source.84 Between 2000 and 2015, plywood moved Figure 6 up from third to second largest timber product imported The complex supply chain in China - simplified graphic According to Arser’s website, the company started its plywood export business in the 1990s under the name into the EU-28 in volume, averaging 8 million cubic

8 Environmental Investigation Agency THE LIE BEHIND THE PLY 9 12 Product

11 All other timber products

10 Fiberboard

Flooring, moulding 9 and strips

8 Joinery Other articles of wood 7 Plywood 6 Wood furniture

5

4

3

2

1

Volume (cubic meters, millions in roundwood equivalent) 0 2011 2015 2013 2017 2012 2016 2018 2019 2010 2001 2014 2005 2003 2006 2007 2020 2002 2008 2009 2000 2004

Source: General Administration of Customs, People’s Republic of China. Compiled by Forest Trends.

Figure 8 China’s exports of timber products to EU-28 countries from 2000 to 2020 in roundwood equivalent (RWE) volume.90

meters per year, valued at USD $1.67 billion.85 Since 2015, the average volume supplied by China has stayed roughly stable around 3.9 million cubic meters per year,86 valued at USD 490 million.87 This trade and market is also very significant for China. Europe is China’s second largest timber market after the United States, and for the past decade, plywood has been China’s second largest timber export to Europe by value and volume, after wooden furniture.88,89

Arser is China’s largest single exporter of plywood to the world and by far the largest single exporter to Europe (Figure 9). An Arser manager told EIA investigators that the company exports approximately 600,000 cubic meters of plywood annually, equivalent to 1,200 containers per month, of which almost half is exported to Europe.91 Trade data seems to confirm this estimate. Between 2015 and 2017, Chinese customs data show that Arser exported plywood to most European countries, namely Belgium, Bulgaria, Denmark, France, Finland, Germany, Greece, Italy, Netherlands, Poland, Portugal,

Romania, Slovenia, Spain, Sweden, and the United Source: EIA, 2020 based on Chinese customs data Kingdom. Together they accounted for 327,000 tons of imported plywood or 40 percent of Arser’s global exports (by weight).92 Figure 9 Arser’s share of Chinese exports of plywood to Europe (right), 93 Arser is also one of the main sources of plywood for by weight, from 2015 to 2017 European countries. From 2015 to 2017, based on Chinese customs data, Arser contributed 25 percent of the UK’s plywood imports from China, 10 percent of Belgium’s, As presented in the following sections, EIA’s Source: EIA, 2020 based on Chinese customs data for years 2015-2017 and was ranked in the top six sources of Chinese investigators have found that one particular group of plywood to Poland, Spain, and Netherlands (Figure 10).94 products made by Arser, pencil cedar-faced plywood, has Figure 10 Arser’s plywood products were thus sold across the been placed on European markets for years in apparent European countries that import Arser plywood European market. breach of the EUTR.

10 Environmental Investigation Agency THE LIE BEHIND THE PLY 11 2

KOLOMBANGARA COVER AND APPARENT FSC FRAUD

In order to fully understand the apparent breach of the due diligence requirements by European companies 2.1 Arser’s Claim who have placed Arser’s pencil cedar-faced plywood on the European markets, one must first focus on Arser’s Arser produces several plywood products for the claims regarding this product and its supplier. Doing so, European market, including what is commonly referred EIA’s investigators found that between 2016 and 2018 to as “red-faced” plywood, in which at least one of the Arser sold at the very least twenty times more cedar- two visible faces consists of a red-looking veneer faced plywood from an FSC-certified source than this usually made of bintangor (Calophyllum spp.), sapele certified concession produced. The considerable mass (Entandrophragma cylindricum), kosipo balance gap found by EIA is consistent with the recent (Entandrophragma candollei), or pencil cedar (Palaquium investigation by FSC that concluded that Arser spp.) Workers at Arser supplier factories as well as a fraudulently inflated the volumes of certified timber 95 representative for a large company competing with sold to its clients. Arser told EIA investigators that over the years, Arser According to EIA research, the supply chain behind the gained a reputation for its specialization in the 96 apparent fraud starts frequently with illegal logging production of pencil cedar-faced plywood. operations in PNG and Solomon Islands, continues with the manufacturing of pencil cedar veneers in China, and Multiple Arser employees told EIA investigators in 2018 ends with the import of the high risk pencil cedar-faced that, when it comes to providing pencil cedar plywood plywood by multiple European countries (Figure 11). for Europe, no matter whether the order is for 100 percent FSC-certified plywood or not, the pencil cedar Based on statements made to EIA investigators in 2018 veneers come exclusively from a unique certified source: by factory managers at three Arser supplier factories a managed forest certified by FSC (FSC-FM) called the (Arser Haode, Pizhou Arser Wood, and a factory not Kolombangara Forest concession, operated by the owned by Arser named Xuzhou Zhongtong), EIA estimates company Kolombangara Forest Products Limited (KFPL), that Arser sold at least 1,366 containers of pencil cedar- 97 faced plywood to European companies each year from located in Solomon Islands. In 2020, an Arser 2016 to 2018; these managers likewise confirmed the representative stated in an email to EIA that the Source: EIA source was from Solomon Islands. (See Annex II for company had ceased importing tropical logs as of detailed breakdown of EIA’s estimate.) EIA has not February 2020. This email was accompanied by a Figure 11 declaration (Figure 12)98 in which Arser claims that “All uncovered evidence that these supplier factories were The pencil cedar supply chain from high risk tropical areas through China to Europe aware of potential wrongdoing. the faces on plywood exported to Europe by Arser were

12 Environmental Investigation Agency THE LIE BEHIND THE PLY 13 Source: Arser, 2020

Figure 12 Figure 13 Declaration to EIA from Arser The pencil cedar-faced supply chain as presented by Arser100

made of legally traceable FSC 100% certified logs” dating forest expert described it: “Kolombangara was subjected back to the implementation of EUTR in 2013. This to probably the most intense logging of any island in the statement is consistent with what Arser employees had Solomons” prior to KFPL operations.102 told EIA investigators. Today the lower slopes of KFPL’s forest concession are Arser employees explained on multiple occasions to EIA covered by an unusual mix of exotic and local tree investigators that the company purchases the entire species coexisting in a secondary forest that includes Source: EIA, based on images provided by KFPL pencil cedar production from KFPL, the only FSC-FM acacia (Acacia mangium), balsa (Orchroma lagopus), certified forest concession that produces pencil cedar in eucalyptus (Eucalyptus deglupta), mahogany (Swietenia Figure 14 Oceania. According to these claims, this would make macrophylla), teak (Tectona grandis), as well as species Kolombangara Island and the Kolombangara Forest Products Limited (KFPL) forest concession Arser the only Chinese plywood producer able to sell from earlier plantings like cedar (Cedrela odorata).103 FSC-certified pencil cedar plywood to the European Only limited areas of natural forest cover have survived market.99 This argument is graphically presented in the and it is only there that some pencil cedar grows on the KFPL is the only company to hold a valid FSC-FM chart that Arser employees shared with EIA investigators 104 KFPL concession. Over 99 percent of the volume of certificate in Solomon Islands.106,107 KFPL conducts logging in 2018 (Figure 13) (See Annex I for the complete supply wood produced and exported by KFPL comes from its operations on approximately 14,000 hectares of the estate chain document shared with investigators), which plantations, not from the rare patches of natural forests and manages a forest reserve area nearly twice as large, presents a fully integrated supply chain in China that 105 (Figures 15 and 16). According to EIA’s investigation, approximately 25,000 hectares. According to the KFPL connects European importers to one single forest of the pencil cedar produced by KFPL has been minimal, general manager, the company has struggled to keep harvest managed by KFPL. peaking at 260 cubic meters in 2016 and not exceeding illegal loggers out of their forests. 140 cubic meters per year since then. Kolombangara is a small, cone-shaped volcanic island of As explained in the following section, the volume of pencil- approximately 15 kilometers in diameter extending from cedar faced plywood that can be manufactured from the sea level to an altitude of approximately 1,600 meters at Despite the very limited amount of pencil cedar produced each year, KFPL was seemingly being used by Arser as a quantity of pencil cedar produced by KFPL represents a its center, located in Western Province of Solomon small fraction of the overall volume of pencil-cedar faced 101 cover, and according to EIA’s investigation, the KFPL Islands. KFPL is responsible for the management of the plywood exported by Arser to its European clients. Kolombangara Forest concession, which covers a large management was not aware of this (see Box 3). When portion of the island of Kolombangara (Figure 14). Prior to contacted by EIA, Arser stated that “from 2014 to 2019, 2.2 Mass Balance Gap KFPL, the Levers Pacific Timber company intensively JHHA [Arser] imported 270,000m3 of FSC logs from KFPL logged and degraded much of the lowland and mid- (including a small amount of certified non-FSC logs) ,of EIA determined that the log volume Arser obtained from course Pencil cedar also included in this quantity,” and altitude forests, legally, up until 1986. In these zones, the KFPL falls short of the amount that would have been Figure 15 also stated that in 2020 it suspended the import of FSC natural forests – where pencil cedar grows - were almost necessary to produce the quantity of pencil cedar-faced Export of KFPL’s logs in bulk from Solomon Islands to China entirely eliminated and replaced by plantations. As a logs from KFPL. plywood that Arser exported to Europe, by nearly 20-fold.

14 Environmental Investigation Agency THE LIE BEHIND THE PLY 15 BOX 3.

MEET THE MANAGER OF KOLOMBANGARA FOREST PRODUCTS, THE “COVER” FOREST

The following paragraphs summarize a Q&A that took EIA: Based on our research and field work, we see high place over Dec 2020-Jan 2021 between EIA investigators levels of illegality in the logging sector of the Solomon and Dan Raymond, general manager of Kolombangara Islands. What is your personal experience in this Forest Products Limited (KFPL), Solomon Islands. domain?

EIA: Were you aware your concession was used as a DR: Sadly this is true. For instance, I have been cover by Jiangsu High Hope Arser to launder wood? approached a number of times in my role at KFPL to provide fabricated documentation for wood in exchange Dan Raymond (DR): No. for payment. The 26,000 hectare reserve we work hard to protect has been entered and illegally logged five EIA: No idea at all? times in the last five years. We currently have four separate court actions underway to stop and apply DR: No. penalties to companies that have illegally come into our protected area. Even if we win these actions, justice will EIA: What volumes have you sold to Arser over the likely not be served because the companies evaporate, years? In particular pencil cedar? their directors are never called to account, and fines are hardly ever paid. In my previous role working within DR: From our records the maximum volume of pencil the Ministry of Forestry for five years I saw the power cedar Kolombangara Forest Products Limited (KFPL) of the timber industry over politicians to get licenses sold to High Hope Arser during one year was about 260 issued when they were clearly illegal, and a range of cubic meters in 2016. Most years we actually sold much other corrupt practices. The timber industry is the less pencil cedar to them, usually less than 140 cubic single biggest source of money in Solomon Islands so it meters per year. But High Hope Arser has purchased a has the ability to influence outcomes and most lot of other timber species from us, in much bigger politicians are involved in some way with forestry volume. Until they stopped purchasing from us by the companies. The good news is the current leadership end of 2019, they were our biggest buyer, purchasing within the Ministry is genuinely working to fight this around 40,000 cubic meters of timber annually. They corruption. bought mostly FSC logs of eucalyptus, gmelina, acacia, campnosperma, terminalia, pometia pinnata [taun] , calophyllum [bintangor] and other mixed species. KFPL EIA: Has KFPL been impacted by the overall sells some non-FSC wood as part of our community environment of unsustainability and corruption? program on behalf of local people in the community who grow plantations on their own land. The money DR: Yes, absolutely. Around the world countries are raised goes to local farmers to support them and their moving to prevent wood products that originated in the families. Arser supported this program, buying a few Solomon Islands from entering their supply chains. This thousand meters of community-grown non-FSC wood a is being done in response to the publicly available year. information on poor forest management in this region. Because KFPL operates in Solomon Islands we have EIA: What are some possible other sources of pencil been caught by these blanket bans and buyers have cedar? deserted us despite our FSC license and the large areas of tropical forest we protect. The negative impacts have Figure 16 Natural forest remnant in the Kolombangara Forest concession DR: Pencil cedar as a group of species mostly grows at been felt by our workforce, the greater community of very low density through the natural forests of Solomon Kolombangara, and has made it harder for us Islands. The exception is the island of Rennell which financially to stop an illegal logging operation from from those operations claims to be sourced from KFPL. We provide training and work opportunities for the has been heavily logged over the last few years. In my entering the reserve through the courts. The extra costs KFPL carry include re-establishing and people of the island. Our workforce can reach 2,000 opinion, any large volumes of pencil cedar from managing our plantations, supporting the people making us the third biggest employer in the Solomon Islands have most likely originated from EIA: Who or what is harmed by using KFPL as a cover? Kolombangara community, providing housing, power country. We support government clinics, schools and Rennell Island. and water for our workforce as well as supporting police services, and support almost every other aspect DR: As a direct result of illegal and poor practices, wood education, health and police service provision. If KFPL of life in Solomons. KFPL is unique in the Solomon It is also worth mentioning that few people are has continued to pour out of the Solomons while prices stops its operations the impact on the communities Islands and across the Pacific and shows a model that, capable of identifying processed timber, so it could be have dropped. For KFPL this has meant it is harder to around us will be disastrous. Having operated for 32 with political will, could be replicated instead of that other species were being used and identified as remain viable while natural rainforest extraction years now, KFPL does not just run a community choosing to simply extract natural rainforest resources Palaquium species. operations continue. It hurts even more when wood program but is part of the community of Kolombangara. as fast as possible.

16 Environmental Investigation Agency THE LIE BEHIND THE PLY 17 As explained above, the general manager of KFPL told a non-negligible risk, that this timber was illegal. EIA investigators that KFPL has produced only small Timber sector workers in China told EIA investigators amounts of pencil cedar, usually no more than 140 cubic that at their level, there is no visible distinction meters per year. The most that was harvested and sold between a species that comes from PNG or Solomon in recent years was 260 cubic meters in 2016. If those 260 Islands, and therefore the timbers from the two different cubic meters of pencil cedar logs were used to produce countries are used interchangeably.108 Pencil cedar grows 0.25 mm-thick veneers - a common thickness for face naturally in the forests of Southeast Asia and Oceania.109 veneers in Chinese plywood - and applied as the face According to EIA’s investigation, the production of pencil and back veneers to a plywood core, becoming a common cedar-faced plywood in China relies on the peeling of 15 mm-thick commercial plywood panel - they would pencil cedar logs imported primarily from PNG, Solomon yield approximately 87,000 plywood panels (Figure 17), 110 Islands and certain Malaysian regions. Indonesia, with which would fill approximately 81 forty-foot (40ft) high a long-standing and reportedly well-enforced log export cube (HC) containers (see Annex II for complete details ban,111 is unlikely to be the origin of the pencil cedar logs and assumptions of the mass balance analysis). manufactured by Arser. Log export bans are also in According to EIA’s findings, the volume of pencil cedar- effect in two of Malaysia’s three regions, and very faced plywood imported by European companies is far limited amounts of logs are permitted for export from greater than 81 40-ft containers per year. EIA’s very the third, making Malaysia an unlikely origin for the conservative estimate, based on multiple discussions pencil cedar used by Arser for the manufacturing of with Arser factory workers, European importers, and pencil cedar-faced plywood exported to its European trade data analysis, indicates that between 2016 and clients.112 PNG and Solomon Islands are China’s largest 2018 Arser exported at the very least 1,366 40-ft sources of tropical roundwood, and Arser Group containers of pencil cedar-faced plywood to European companies have previously imported large quantities companies each year. In other words, for that period, of logs from PNG.113 EIA believes that PNG and Solomon European companies appear to have imported almost Islands are the likeliest sources of the pencil cedar used 20 times more pencil cedar-faced plywood than Arser by Arser. can produce from the limited volume of FSC-certified pencil cedar logs exported from the Kolombangara Forest PNG has the third largest forest in the world and is concession. Of the at least 4,098 40-ft containers of known as one of the “megadiverse” countries in the pencil cedar plywood exported in total from 2016 to 2018, world, containing over seven percent of the world approximately 95 percent–3,855 containers—likely did biodiversity.114 PNG is also China’s single largest source not originate where Arser claimed they did, and were of tropical roundwood and China is the destination for likely placed on the European markets with a 85-90% of the logs harvested in PNG.115,116 Pencil cedar is misdeclared origin. When contacted by EIA, an Arser one of the key species of timber PNG sells to China.117,118 representative stated that “During 2016-2018, [Arser] The country is one of the most biodiverse places on exported some volume of Pencil cedar-faced plywood, earth, home to tens of thousands of plant species.119 but far less than 1000 containers / year.” Of the over 100 timber species harvested and traded, around 20 are well known,120 and pencil cedar is among 2.3 Inconvenient Origin the most valuable. According to available data for 2017- 2019, PNG has exported large and increasing quantities of The exact origin of the pencil cedar used in the thousands pencil cedar logs, from 100,000 cubic meters in 2017 to of plywood containers exported by Arser to European 137,000 cubic meters in 2019. Pencil cedar saw and clients is unknown. As shown in the following paragraphs, veneer-grade logs were in the top five most valuable EIA concludes that there is a high likelihood, and certainly species sold in those years.121,122,123

Source: EIA Source: Alessio Bariviera Source: Alessio Bariviera

Figure 17 Figure 18 The mass balance analysis gap Typical uncontrolled logging and forest clearing operations in PNG (left) and Solomon Island (right)

18 Environmental Investigation Agency THE LIE BEHIND THE PLY 19 Illegal logging is pervasive in PNG. Estimates for the that it cannot be FSC-certified. FSC’s database shows “The Jiangsu High Hope Arser group of companies and the percentage of logs obtained from PNG at risk of having BOX 4. only three certified forest concessions harvesting pencil group’s processing manufacturers had inflated volumes of been illegally sourced range from 70 to 80 percent.124,125 cedar outside of Indonesia – where a long-standing and certified wood and were selling it as FSC-certified into the PNG’s logging sector is beset with rampant corruption PENCIL CEDAR: A THREAT well-enforced log export ban is in effect.155 The first such European market. Two of these certificates have now and illegal practices, mismanagement, lack of law concession is located in Peninsular Malaysia, where a been suspended pending further investigation, and four enforcement and systemic failure to protect TO THE RENNELL ISLAND log export ban has been in place since 1985.156 The have been terminated. Further investigations involving communities’ interests and indigenous land rights second is located in Sabah, Malaysia, where a log export other companies are still ongoing and may lead to 159 (Figure 20).126,127 The country ranks 138th in WORLD HERITAGE SITE ban has been in place since 2018.157 The last one is the additional suspensions or terminations.” Transparency International’s 2018 Corruption Kolombangara Forest concession located in Solomon 128 Just 80 kilometers long and 14 kilometers wide, Rennell 158 The FSC investigation focused on plywood made with Perceptions Index, out of 180 countries assessed. Island is the southernmost island of the Solomon Islands. There is no FSC-certified forest in PNG. face veneers of tropical timber species commonly known Islands. The eastern part of the island is the world’s as bintangor (Calophyllum spp.), and came to a conclusion largest raised coral atoll, rich in biodiversity and 2.4 Inflated Volumes and Potential Most logging operations in PNG involve violations of very similar to EIA’s: Arser potentially committed large endemic species, and was designated a UNESCO World Fraud in FSC scale fraud, inflated volumes of certified timber and sold laws and regulations according to independent Heritage site in 1998 (Figure 19).142 East Rennell was the assessments.129,130 Between 2012 and 2016, around uncertified timber as certified. To EIA’s knowledge, Arser first natural site under customary law to be inscribed on EIA’s investigation finds that, contrary to Arser’s claim, has not responded to FSC’s findings. According to its a third of PNG’s log exports originated from forest UNESCO’s World Heritage List. it appears that over 90 percent of the pencil cedar-faced clearance operations nearly all of which were illegally statement, FSC broadly identifies plywood manufactured plywood exported to Europe by Arser included timber 161 licensed, in violation of indigenous communities’ land in China as “posing a risk of false FSC claims.” It is also with a high risk of being illegal, most likely originating worth noting that as of June 2020 the FSC certificates rights, according to an independent PNG government from PNG and Solomon Islands, and possibly derived website lists some 6,500 Chinese companies whose inquiry, government officials and, in some cases, court from the destruction of an East Rennell UNESCO World certificates have expired or been terminated, and a further decisions. In this period a holding company for Arser’s 162 Heritage Site. EIA’s findings regarding Arser’s apparently 300 currently suspended. Considering that European parent company, Jiangsu High Hope International 131 deceptive use of the FSC-certified Kolombangara buyers for years viewed Arser as one of the best plywood Group, imported over 125,000 cubic meters from one 132,133 Forest concession coincide with the results of an manufacturers in China, it is essential that FSC investigate of these controversial operations. investigation by FSC. In January 2021, FSC announced the major Chinese plywood brands claiming to sell certified conclusion of an internal investigation focused on the timber products. It is also essential that European Solomon Islands, like PNG, is home to remarkably transactions conducted by Arser during the first half of importers take appropriate due diligence actions to biodiverse rainforests, with some sources estimating 134 2019 (Figure 20): mitigate risk associated with imports from the above 4,500 different plant species. A small set of these mentioned list species, perhaps 30 to 40, are commercially harvested, Source: UNESCO / Adam Stewart Hogg and pencil cedar is among the most important and high- Figure 19 value.135 As is the case for PNG, the risk that exported East Rennell Forest143 timber is the product of illegal logging is very high in Solomon Islands, upwards of 80 percent according to The island is also highly coveted for its numerous some estimates.136 Numerous causes contribute to serious bauxite reserves which lie beneath a forest that 144,145,146 and widespread illegal logging in Solomon Islands, contains an unusually high density of pencil cedar including lack of capacity to enforce forest laws, poor Some reports state that Rennell Island is the country’s 147 protection of land rights, collusion between logging “only island” to have pencil cedar as the common tree. companies and government officials, and other forms For years, foreign logging and mining companies have of corruption.137 Recent reporting has highlighted the exploited the western part of the island, often illegally clearing the pencil cedar-rich forests before exporting issue of illegal logging and recurrent conflict with 148 communities in Solomon Islands.138,139 the logs out of the island. This clear cutting and uncontrolled logging happening on the west of the According to the International Monetary Fund, “attempts island has directly impacted the East Rennell UNESCO World Heritage site, including the fauna populations to reduce uncontrolled logging have been unsuccessful. 149 Regulatory enforcement is currently lax, and the including endemic birds. 140 industry is largely controlled by foreign companies.” The uncontrolled exploitation on western Rennell Common types of illegalities in Solomon Islands include: Island has repeatedly encroached on East Rennell in logging without permission of the landowner, logging spite of its World Heritage protection status.150 outside concession boundaries or in excess of allowed Recognizing the threat, UNESCO included East Rennell number of trees, logging in prohibited places and logging to the List of World Heritage Sites in Danger in 2013.151 of protected species, logging without conducting environmental impact assessments, and non- Yet the threats have only grown in recent years. Asia compliance with legal requirements for providing Pacific Investment Development (APID), an Australian detailed logging maps.141 An industry source in Solomon owned company, repeatedly ignored orders to cease Islands told EIA investigators that he believes the export logging and exports of logs, even after the government revoked its mining license in 2015.152 APID was found of pencil cedar from Solomon Islands to China in recent guilty of illegal logging in a 2015 High Court case.153 years relied on clear cutting of forests located on Rennell The same year, Samlisan, another foreign mining Island, home to the UNESCO first natural World Heritage company, was found to be illegally harvesting outside site and its buffer zone (see Box 4). its concession and offshoring enormous volumes of logs. The company harvested and exported 50,000 cubic Source: FSC website The pencil cedar imported by European companies that meters of timber, exceeding the maximum allowable Figure 20 was not coming from the Kolombangara Forest 154 160 amount per year in a matter of months. FSC’s statement on suspension and termination of Arser’s group entities concession is at high risk of being illegal. It also appears

20 Environmental Investigation Agency THE LIE BEHIND THE PLY 21 3

Altripan NV had breached EUTR, and according to preliminary information received by EIA, both companies received warnings to cease the violating actions or be fined.164 At the time of writing, no Competent Authorities have made their investigation outcomes public. The cases brought by EIA regarding European companies' apparent violation of their due diligence obligation under EUTR when they imported Arser’s products provided unprecedented detail about the opacity of the plywood industry in China and the seeming complicity of European importers.

The EUTR took effect in 2013; it places two compliance obligations on the entities (typically the importers) who first place timber on the EU market. First, they must not place illegally harvested timber on the EU market. Second, they must exert due diligence in order to minimize the risk that they are placing illegally harvested timber on the EU market. The purpose of the due diligence obligation is to reduce the risk that illegal timber be placed on the EU market to a close to zero risk level also called “negligible” risk level in the regulation (see Box 5 for details on the due diligence obligation).165

The non-negligible risks of import of illegal timber on the EU and UK markets posed by the import of Chinese plywood into Europe have been on European authorities radar for years. In 2015, the UK National Measurement Office released the results of a study focused on plywood manufactured in China and placed on the market in the Alphaply outside the Arser factory UK. Of the 13 plywood samples tested with complete Figure 21 results, only three contained the actual species that the Alphaply, an Altripan pencil cedar-faced plywood product, importing company had claimed them to be. The inside an Arser factory, and circled detail showing handwritten importer claims were incorrect for five of the 13 tested DILIGENT FAILURE: THE ROLE OF THE text: “100% poplar”. face veneers, and for eight of the 13 core veneers. Some of the species that were found were likely of tropical Belgium? origin, such as palaquium (pencil cedar), sapeli, EUROPEAN COMPANIES 172 Arser: Altripan. bintangor, red meranti, medang, and kedongdong. EIA: Only Altripan? The findings by the UK EUTR Competent Authority (CA) According to EIA’s findings, between 2016 and 2018, a from Arser and place it on European markets. In certain Arser:Yes. [...] were unambiguous: minimum of 3,855 containers of pencil cedar-faced cases, it appears they went further. One Arser sales EIA: And in the Netherlands? plywood containing tropical timber of high risk, employee explained to EIA investigators the collaborative Arser: Sakol. unknown origin have been imported into and business relationship and the type of special requests “Of these, 14 companies submitted due diligence systems presumably placed on the European markets.163 Based on sometimes made by their clients, like Altripan, one of the In a statement to EIA, Altripan’s CEO stated “we did not that were insufficient when compared to Article 6 of the EIA research, the origin of all the pencil cedar can not be largest plywood importers in Europe regarding their ask to mark pencil cedar faced poplar core as ‘100% European Timber Regulation (EUTR) No 995/2010, which KFPL as claimed by Arser, and it appears that contrary to branded pencil cedar-faced Alphaply plywood product poplar’,” and said he “could not find any instruction nor outlines an Operator’s obligation to implement a due Arser’s repeated statements, the pencil cedar was likely (Figure 21): any photo of plywood from Arser marked as ‘100% poplar’ diligence system. The common thread running through not coming from an FSC-FM certified source. with Pencil Cedar faces.” these failures was a lack of narrative explaining how the “EIA: The Alphaply plywood we saw in the factory we combination of document gathering, risk assessment EIA investigators found that several European importers visited, it’s saying on the package ‘one hundred percent 3.1 Chinese Plywood on the Radar and mitigation (where necessary) enable the company to reach a conclusion of negligible risk that the timber in of Arser plywood were to certain degrees aware of the poplar,’ but it’s actually pencil cedar and poplar.[…] Why 173 scheme developed by Arser. They expressed to EIA their do you do that? Based upon more than five years of investigation and the product was sourced illegally.” doubts about the legality of the timber, their suspicions Arser: The customer requires to brand it. Maybe the indications of likely EUTR violations, in 2019 and 2020 about the mass balance gap, their distrust towards customer likes it. But yes the face and back are pencil EIA filed a series of Substantiated Concerns (SC) with These results and their consequences for the industry 174,175,176 official documents presented by the company, and their cedar. Just the core is poplar. European authorities, focusing on the import of Arser’s were widely reported across Europe. A year later, knowledge of the likely FSC fraud that at least one of the EIA: But you put ‘one hundred percent poplar’ so maybe pencil cedar-faced plywood by International Plywood the German authorities in turn focused their attention on European companies may have helped to cover up. customs is not suspicious? Or it’s easier to pass? (UK), Sakol (Netherlands), and Altripan (Belgium). Dutch Chinese-made plywood. As an outcome of the controls Despite this knowledge, European importers have Arser: Maybe.” and Belgian competent authorities conducted and testing they carried out, German authorities came to continued to import the pencil cedar-faced plywood EIA: It’s interesting. Do you have other customers in investigations into these SCs and agreed that Sakol and the conclusion that misdeclaration of species should

22 Environmental Investigation Agency THE LIE BEHIND THE PLY 23 ultimately be interpreted as a sign that the due diligence But the efforts of competent authorities and timber that allowed them to address quality issues one after BOX 5. system put in place by the importer is not working. A federations were not enough. Multiple importers of another—yet they left origin, legality, and paperwork representative from the German CA further explained Arser plywood told EIA investigators that they were authenticity issues unsolved. THE DUE DILIGENCE PROCESS that their effort should be particularly focused “on the aware of risks in their supply chain, did not fully element of the German EUTR law which enables the CA mitigate them, and continued to import Arser’s pencil Some European companies who spoke with EIA The EUTR places two types of obligations on those to order an Operator to send timber back if they cannot cedar-faced plywood. As presented in the following investigators have imported pencil cedar-faced plywood 177 who first place timber on the EU market, referred to prove that it is legal.” section, importers addressed their recurrent quality from Arser for many years. A manager from the Dutch as the “operator.” The first one is fact-focused: illegal problems with their supplier, but did not fix legality company Sakol told EIA investigators that his company European timber federations have also regularly invited and origin problems. Consistent with this analysis, has been importing pencil cedar from Arser for seven timber must not be placed on the EU market. The 182 second obligation, referred to as the “due diligence” their members to pay close attention to the import of EIA has filed several legal complaints with the years. Arser also held a longstanding relationship with obligation, is process-focused and is designed to Chinese-made plywood, especially when it contains Belgium, Dutch and British EUTR CAs. To date, no CA its largest European client, the British company minimize the risk that the operator places illegally tropical species.178,179 In particular in the UK, tropical investigative findings have been made public. International Plywood (IP). IP was a corporate sponsor harvested timber on the EU market.166 In carrying out plywood from China is still considered high risk for Arser employees’ football team (Figure 23). due diligence, the operator must follow a three-step according to the Timber Trade Federation (TTF). 3.2 Yes We Can: Address Quality In order to build their relationship, European importers process: access to information, risk assessment, and, According to the TTF, “These products are accompanied Control Issues or their third-party representatives may make frequent when necessary, risk mitigation. by low scores on the Corruption Perception Index (CPI) trips to China to visit their plywood supplier. For in both the country of harvest and processing, an According to EIA’s investigation, several European example, in January 2018, an Arser sales employee Timber products can be placed on the EU market if abundance of illegal logging reports, and a high companies built a long-standing relationship with Arser explained to EIA investigators: the risk evaluation concludes that the risk is close to likelihood of mixing (with non-declared species or 167 zero or “negligible” according to the EU regulation. species of different origins) within the supply chain.”180 If the detected risk is greater than negligible, a TTF’s latest warning openly points to multiple mythical mitigation step must be carried out. It must consist of claims related to the import of tropical plywood from a set of “measures and procedures” that are “adequate China (Figure 22). and proportionate to minimise effectively that risk”.168 Risk mitigation steps often involve obtaining additional information or documents, and/or requiring third party verification. By nature, the due diligence obligations are not one-size-fits-all and thus vary depending on the operator’s particular products and supply chains. The mitigation should be proportionate to the risk associated with the origin and supply chain. Of particular note is the fact that purchasing third-party verified timber, such as FSC- certified products, does not replace the operator’s due diligence obligation and does not guarantee that one has complied with the legal process; the operator must be able to demonstrate the source of the timber.169

After these mitigation steps, if the risk of illegality remains greater than negligible, the timber should not be placed on the EU market. If it is, it represents a violation of the EUTR by the individual/company who placed the timber on the EU market.170 According to the EUTR, if an operator does not satisfy the due diligence obligation, it has breached the provisions of the European regulation, even if the timber in question is legally harvested.

Criteria for the risk assessment could include, inter alia, the prevalence of illegal harvesting in the country or region of harvest, complexity of the supply chain, and existing assurance of compliance with applicable legislation or third-party verified schemes (e.g. FSC).171

According to these criteria, the general risks associated with the pencil cedar-faced plywood Source: TTF’s website supply chain are high due to the origin of the timber, Source: Screen capture from Arser’s website the forest governance issues in PNG and Solomon Figure 22 Islands, and the complexity of the supply chain. Tropical plywood made in China: the risks identified by the Figure 23 183 industry181 Arser employees’ football team with International Plywood’s logo on their shirt

24 Environmental Investigation Agency THE LIE BEHIND THE PLY 25 “Arser: Every year each customer from Europe, they A manager from Sakol explained to EIA investigators the A manager at Meyer expressed doubts about the claimed come to us at least three times. 3.3 Yes We Can: Ignore Legality Risks lack of transparency in the supply chain: origin of the product hidden behind an opaque and EIA: So Altripan for example they come three times, to untrustworthy supply chain. He told investigators in visit you? On the one hand, Arser’s European customers told EIA “EIA: In your company are you aware of the issues in 2018 that the legality of timber products they import Arser: Yes, last year, they came to us four times. So next investigators that they have managed to resolve quality China and have you tried to solve it with your supplier? from China is “questionable” and explained: time, yesterday the owner from Altripan just told me, he control issues. On the other hand, they explained that Or already thinking that ‘we need something else?’ I will come back again in March, in the middle of March they have identified risks regarding the unknown origin want to see where you are in this path of transparency. “Meyer: No, it's difficult because if you think of Arser, after Chinese New Year. of the timber and have not mitigated them. How are you? maybe they've got five Arser mills. Maybe they deal EIA: Do they discuss about EUTR requirements? Sakol: It's a difficult question, we are still working on it. with 40 Arser mills, so they have five of their own but Arser: No need, EUTR because we do very good job on European importers told EIA investigators they were I think we are on a better way for that but we don't have they bought business elsewhere and that's a problem to EUTR, so the customers they never talk about the EUTR, aware of the mass balance gap—the gap between what a solution. us. They tell us they do not put our business anywhere they like to talk about the price and the quality. But the certified Solomon Islands forest could produce and EIA: So you have still a problem there? but the five mills, but sometimes we can't trust it. But EUTR we just, our office just, the EUTR is the what Arser was selling (see Section 2.2). Therefore they Sakol: Yes. [...] you can only go on the paperwork, you can only do the paperwork, the working is just [done] by our office and were aware that they could not know the true origin EIA: You know this supply chain is completely visits, you can only go to see them and we are a long connecting with their office.”184 of the timber they were importing into the EU. A high- untransparent? way away. Many miles…”189 level manager from the Belgian company Altripan Sakol: Yeah. The years of collaboration have allowed Arser and its explained: EIA: And cannot be followed? Yet the same year, a supplier factory for Arser produced European customers to solve the recurrent issues Sakol: Yeah. boxes of pencil cedar-faced plywood for Meyer. (Figure 24) regarding quality control. Recurrent testing has been put “Altripan: You have 1,000 cubic meters FSC [timber] EIA: And cannot be trusted? in place in China and in Europe in order to guarantee from Solomon Islands, [and of that ] there's only 20 Sakol: Yeah.” When contacted for comment, a spokesperson for Meyer cubic meters pencil cedar… So again this is a species that the plywood imported by European companies 187 stated “As a company we have visited every part of the respects the EU regulations for performance standards, that is kind of tricky for the long term.” plywood supply chain in China,” “Meyer has always in particular regarding glue toxicity, veneer grade and classified Chinese plywood as non negligible risk,” and timber species identification. As a representative A senior manager for IP told investigators in 2018: “We have removed the purchasing of tropical logs from from the UK-based company Meyer explained to unknown supply chains within China.” investigators: “IP: So I agree with you, I don't quite think that the figures stack up quite as well as they should be. And it A manager from the UK subsidiary of the Belgian has been [mentioned] to us before just recently that they “Meyer: Yes, so we are testing our plywood regularly to company Altripan explained to EIA investigators that are bringing in so many logs and producing this amount. make sure that it reaches the grade that we have given the risks associated with pencil cedar-faced It would have to be like a 100 percent yield from a log. purchased and it fails regularly. But it is not just our plywood, his company decided to stop importing it into And you know that if you get 30 percent for face and company, it is across the whole of the industry. […] the UK market. He explained that this decision was back that's good. It's more likely to be 20 percent.[…]” So there is a big problem with the industry with that at taken because of the different level of enforcement of 185 EIA: But that means that 80 percent of the face you don't the moment.” EUTR between the UK and other parts of Europe where know where it comes from? Altripan sells its products, such as France, Italy, IP: Yeah. Perhaps...Perhaps... To be honest we are 190 The need for increased quality control and Benelux, Netherlands, and Poland. Meanwhile, thinking of alternatives… That's why we have moved a responsiveness has created a niche for third-party Altripan continued to import this product from Arser via lot of stuff onto eucalyptus, beech. More temperate companies, hired by European importers to verify quality the the port of Antwerp in Belgium and sell it in hardwoods rather than tropical hardwoods. I think in China, before containers are loaded and shipped to different countries across Europe, EIA investigators tropical hardwood is always going to be difficult. The 191 Europe. Some of these companies have also taken 188 learned in meetings with Arser representatives. greens are never going to be happy.” responsibility for the export of the plywood and the Altripan did not respond to inquiries on this matter when contacted by EIA. import to Europe. An employee from one such company, When contacted by EIA, IP stated that “International which works with Meyer and B&Q in the UK, among Plywood have not been informed by any credible other European timber importers and distributors, organisation or body that [Arser] have been supplying 3.4 Yes We Can: Accept explained to EIA investigators: more Tropical Faced Plywood including pencil cedar- Untrustworthy Documents faced plywood that they claim to be made with 100% “Importer: We have our own two inspectors in China. We FSC material than was possible using timber only Many of Arser’s European clients told EIA investigators have a policy: we don't ship anything until it has actually originating in KFPL.” they doubted the validity of the documents they received been inspected and also we go to the factory ourselves from their Chinese business partner. A manager for the and make sure the quality is good before we place any A representative for a large European importer explained Dutch company Sakol explained: orders as well. Even then it cannot be guaranteed to get the gap between the certified supply and the amount of 186 good quality [...] But we do our very best.” product produced by Arser, and summarized to EIA “EIA: You said your documents, they are from China investigators the resulting risk of importing illegal timber: right? The documents you receive that prove the origin, In response to the quality control protocols established they come from China? over the years, most European importers who spoke to “Importer: I mean everyone knows how the business Sakol: Right, yes. EIA investigators mentioned substantial progress in the works. You have like logs and how many pieces of the EIA: You don't have from the country of origin? quality of the plywood products they have been veneers do you get out of the logs? Not 100 percent but Sakol: It is from China. We are doing business in China. importing from China. However, this attention has in the end most Chinese producers will end up with 100 That is the chain. […] It is only China paperwork.[…] Figure 24 prioritized addressing quality problems and collecting percent of veneers out of one single piece of log. It’s just Boxes of Meyer plywood labeled palaquium (pencil cedar) in EIA: Do you trust 100 percent these documents you paperwork, rather than critically assessing the legality not possible.[…] I have even seen this in Chinese an Arser factory receive from China? Do you think that it is always... and origin of the timber. factories. It is too dangerous.” Sakol: No, I don't.”192

26 Environmental Investigation Agency THE LIE BEHIND THE PLY 27 A Meyer manager expressed similar doubts about the investigative journalist described in 2018 in an article for documents they received from their Chinese suppliers: the Chinese news outlet Sixth Tone: “in China, the [FSC] CONCLUSION AND RECOMMENDATIONS logo has become less a symbol of sustainability and “EIA: How many percent do you trust the document you more a tool for ‘greenwashing’ — allowing illegally receive now, 70 percent or... harvested timber to avoid scrutiny and enter global Between 2016 and 2018, EIA estimates that nearly 4,000 containers of high risk Meyer: I would say we don't. No, I wouldn't say that markets.” This journalist posed as an importer to Europe, tropical face plywood of unknown origin were imported into the EU. According to much. You have to trust it because you have to prove visiting nine different Chinese enterprises of varying EIA’s investigation, many European importers were aware of significant risks, yet what you have done: what is the country like, is there sizes. Seven of the nine spoke openly about using FSC continued importing. This multi-country scheme represents one of the largest any corruption in the country, is the company corrupt, logos and certification despite not meeting the is the company trustworthy, is all the paperwork there, standards. For the companies, the risk of being caught by reported violations of the EUTR since it came into force in 2013. do we believe it? So yes, we have to say we trust it, but European authorities is negligible, as neither regulators we can't say 100 percent because the countries are nor buyers bothered to adequately check the authenticity Arser, the largest Chinese plywood manufacturer and exporter to the world, appears to be at the heart of the problem. Contrary to the company’s claim, it appears that over 95 percent of the pencil cedar-faced plywood corrupt and the government's are corrupt and trade is of the certification they provide. According to company 193 exported to the EU between 2016 and 2018 were coming from areas with very high risk of illegal logging and corrupt, even in the UK.” employees quoted in that article, “European importers are likely laundered into the market through fraudulent FSC certification claims. To cover over an opaque supply aware of and even encourage such fraud.” China’s FSC 196 chain in China and facilitating due diligence failures in Europe, Arser may have taken advantage of weaknesses representative confirmed the abuse of the logo. When contacted for comment, a representative for Meyer in the FSC chain of custody system as part of the alleged major FSC fraud scheme. responded: “From 2014 to 2018, not a single report became available that would oppose the use of FSC certification A senior manager for a European company importing According to EIA’s long-term investigation, Arser’s operation and alleged fraud illustrate the systemic problems of as risk mitigation in the procurement of plywood plywood and other wood products described to EIA the opacity, fraud, and cover up observed in multiple occasions throughout the tropical-faced plywood sector in China. utilising face material from Solomon Islands. However, casual abuse of FSC’s system occurring in China: following on from the publication of NGO reports in the EIA’s investigation reveals the risks directly associated with complex and globalized supply chains. In order to autumn of 2018 in relation to the Solomon Islands, Meyer “EIA: But how do they do FSC in China? make the EUTR more effective against these apparently illegal timber flows, both Chinese and European Timber stopped the purchasing of any plywood from Importer: It's fake. It's fake. Just… You know FSC… regulators must rise to the challenge, combining stronger enforcement with adopting effective systems for [Arser] that incorporated any component that originated There are maybe 20 guys in China… You know, bribes, transparency and traceability. in the Solomon Islands.” it's just a joke. But it's like that: there's an invoice, it’s written FSC, there's a number, that's it. […] ‘My company EIA recommends: The senior manager for International Plywood (IP) is PEFC or FSC,’ all these things, I think it’s bullshit, but I explained how in his experience, IP’s Chinese suppliers need it. So from China we bought some FSC, I knew it To regulators in the EU and UK l would not provide accurate information about the wasn't real. We stopped, because we said we didn't like Investigate and, as appropriate, prosecute under the EUTR and UKTR the European companies that have imported high risk pencil cedar-faced plywood without adequately mitigating identified risks. species supplied for the plywood: it, and a few more things… But there's a big guy here that's doing it. He's taking the risk. That's it.”197 l Recognize the high risks associated with the import of plywood made in China using imported tropical timber “IP: And all these names, palaquium, that everyone was and increase the controls on imports of these products. coming up with these names but it was all virtually the A senior manager for IP told EIA investigators that IP had same. They would bring in these logs and they would be discovered and covered up instances of Arser violating l Increase EUTR enforcement with the issuance of adequate penalties in order to effectively deter illegal imports. like an assortment but the only ones that they could FSC requirements in its supply chain. He referenced actually peel and make plywood from was probably the timber originating from Solomon Islands and appeared to To regulators in China l Expand administrative and law enforcement efforts related to the plywood industry and its supply chains to pencil cedar. The rest of it, they might put it on the reference KFPL, the Kolombangara forest, in particular: address legality issues, such as document fraud. shipping documents and say it was that… But fuck it. 194 “EIA: So you are still in the middle of a black box? We’ve been in this game too long…” l International Plywood: On some of the other ones yeah, Leverage the drafting phase of the Forest Code implementing regulation to establish mechanisms that will protect China’s plywood industry from the import of illegal timber. but the guys that actually import the logs themselves, I When contacted for comment, the CEO of IP responded can't remember the name of the company… Kolimgari? “We as a company do everything that is practically l As proposed in Article 65 of the revised Forest Code, establish an effective ledger system in order to hold every ... In the Solomon Islands. So they were bringing all of possible to confirm the source of every product that entity along the supply chain accountable. the logs in for them, buying a variety of things and then we import.” they were going and peel themselves. Even then when To regulators in China, the EU, and UK they were still doing that, first of all, they were getting l Use existing platforms, including the EU-China Bilateral Coordination Mechanism, to develop a pilot project 3.5 Yes We Can: Cover Up them peeled at not their factories, but outside factories. focused on enhancing tropical-faced plywood trade legality, transparency and traceability. Potential Fraud So the chain of custody was then lost. So we couldn’t l Increase trilateral coordination regarding the control and regulation of China–EU and China–UK plywood say: ‘Well hang on a sec.’ We were not going to say supply chains containing imported and tropical wood. “There are rumors circulating that the people in China anything to FSC because we have been selling this as are actually selling more FSC veneer, bintangor or pencil FSC, but you know at the end of the day it's not right, To timber industry actors in the EU and UK cedar veneer, than the people in the Solomon Islands can you need to have full control. So when those logs arrive, l Consider all tropical-faced plywood manufactured in China to have unmitigatable risks and do not import it actually ship.” This is how a manager from a plywood it's got to go to the peeling factory, then the veneer and until China implements a robust transparency mechanism that makes it possible to trace timber materials importer for the UK, described to EIA investigators the then the factory.”198 from source to product. issue of suspected FSC fraud related to the export of pencil cedar-faced plywood to Europe. The same When contacted for comment, the CEO of IP responded: To FSC importer went on, “In China you can buy an FSC “International plywood has a state of the art computer l Implement immediate actions to stop systematic fraud among FSC-certified companies in the Chinese certificate if you know the right people. You can buy an system which monitors all chain of custody data and is plywood manufacturing sector, focusing on supply chains that involve tropical timber and global manufacturers. FSC certificate without any audit being done.”195 100% accurate. We are able to substantiate every pack of l plywood we deliver […] every delivery to every customer Require transparent digital tracking and reporting of all sales of FSC-certified wood products to prevent double- counting, from the stump to the final consumer. Alleged FSC fraud schemes related to the Chinese is 100% accurate in its product description and plywood sector have been widely reported. As an certification status.”

28 Environmental Investigation Agency THE LIE BEHIND THE PLY 29 ACRONYMS LIST OF FIGURES

CA Competent Authority Figure 1. Evolution of the production of wood-based panels by the top five producer countries, in volume ...... 3

CPI Association Baka Bantou pour le Développement Durable de Ndjibot et de Ngoulminanga Figure 2. Import versus export of plywood in China, by volume ...... 4 CA Competent Authority Figure 3. Main importers of Chinese made plywood, by volume (2000-2013) ...... 4 CPI Corruption Perceptions Index Figure 4. China’s tropical log imports ...... 6 EIA Environmental Investigation Agency Figure 5. Examples of typical small-scale veneer mills and plywood manufacturers in China ...... 7 EU European Union EUTR European Timber Regulation Figure 6. The complex supply chain in China ...... 8 FSC Forest Stewardship Council Figure 7. Example of Arser’s carefully crafted public image ...... 9

FSC-FM Forest Stewardship Council Figure 8. China’s exports of timber products to EU-28 countries from 2000 to 2020 in volume. Volume is stated roundwood equivalent (RWE)

IP International Plywood cubic meters, in millions of cubic meters ...... 10 ITTO International Timber Trade Organization Figure 9. Arser’s share of Chinese exports of plywood to Europe (right), by weight, from 2015 to 2017 ...... 10 KFPL Kolombangara Forest Products Limited Figure 10. European countries where Arser’s plywood products are placed ...... 11 PNG Papua New Guinea Figure 11. The pencil cedar supply chain from high risk tropical areas through China to Europe ...... 13 RWE Roundwood Equivalent SC Substantiated Concern Figure 12. Declaration to EIA from Arser ...... 14 TTF Timber Trade Federation Figure 13. The pencil cedar-faced supply chain as presented by Arser ...... 14

UK United Kingdom Figure 14. Kolombangara Island and the Kolombangara Forest Products Limited (KFPL) forest concession ...... 15

UNESCO United Nations Educational, Scientific and Cultural Organization Figure 15. Export of KFPL’s logs in bulk from Solomon Islands to China ...... 15

Figure 16. Natural forest remnant in the Kolombangara Forest concession ...... 17

Figure 17. The mass balance analysis gap ...... 18

Figure 18. Typical uncontrolled logging and forest clearing operations in PNG (left) and Solomon Island (right) ...... 19

Figure 19. East Rennell Forest ...... 20

Figure 20. FSC’s statement on suspension and termination of Arser’s group entities ...... 21

Figure 21. Alphaply, an Altripan pencil cedar-faced plywood product, inside an Arser factory, and sharpened detail showing handwritten text:

“100% poplar”...... 23

Figure 22. Tropical plywood made in China: the risks identified by the industry ...... 24

Figure 23. Arser employees’ football team with International Plywood’s logo on their shirt ...... 25

Figure 24. Boxes of Meyer plywood labeled palaquium (pencil cedar) in an Arser factory ...... 26

LIST OF BOXES

Box 1. Plywood Anatomy ...... 5

Box 2. “Blue Skies,” Painful for Factories ...... 9

Box 3. Meet the manager of Kolombangara Forest Products Ltd., the “cover” forest ...... 16

Box 4. Pencil cedar: a threat to the Renell Island World Heritage Site ...... 20

Box 5. The Due Diligence Process ...... 24

30 31 ANNEXES

Annex I: The pencil cedar-faced supply chain from KFPL through Arser Supporting Documentation Required for;

STEP 2A. CHECKED AND VERIFIED ON FSC WEBSITE - 15/08/2016 STEP 1. Doc no: SA-FM/COC-001070 Species: PALAQUIUM, CAMPNOSPERMA, TERMINALIA, CALOPHYLLIUM SPP, Pometia spp； Valid from: 20/06/2015 Country of Harvest: Solomon Islands Valid until: 20/06/2020 Issued to: Kolombangara Forest Products Ltd. Stamped by: Soil Association Species: Acacia mangium; Aglaia spp.; Anthocephalus chinensis Rich.; Calophyllum spp.; Campnosperma spp.; Cedrela odorata; Cordia alliodora (Ruiz & Pavon) Oken; Cryptocarya spp. Tropical Asia; Dillenia spp.; Endospermum STEP 2. Forest of harvest spp.; Eucalyptus deglupta Blume; Eucalyptus grandis; Eucalyptus tereticornis; Eucalyptus urophylla; Gmelina arborea Roxb.; Gonystylus spp.; Myristica spp.; Ochroma lagopus Sw. (Balsa); Octomeles sumatrana Miq. (Binuang); Name: KOLOMBANGARA FOREST Palaquium spp.; Paraserianthes falcataria (L.) Nielsen; Pinus caribaea; Pinus kesiya; Pometia spp; Prunus sp. (Yvaro); Address: Ringgi Cove, Kolombangara,Solomon Islands Pterocarpus indicus; Swietenia macrophylla; Tectona grandis; Triplochiton scleroxylon K. Schum.; Vitex spp. Volume: N/A FM/COC Number: SA-FM/COC-001070 Supplied as: FSC Certified

STEP 3B. STEP 4. Import Company STEP 3. DOC 3 - UPDATED BL.PDF Bill Of Lading Felling Licence Name: Jiangsu High Hope Arser Co Ltd. Document Ref. No.: KFPL/201609 Document Ref. No.: TIM 2/74 Address: 18F,#98,Jianye Road,Nanjing,China Date: 20/09/2016 From: 10/02/1995 COC NO.: SCS - COC - 005079 (Brokers without Physical possession) From: KOLOMBANGARA FOREST PRODUCT LTD Until: 31/01/2065 To: Jiangsu High Hope Arser Co Ltd. Valid for: Kolombanga Forest Products Species: Plantation export round logs Species: N/A 3 Volume: 9,880 pieces/9125.094 m3 Volume: 250,000 m per annum STEP 6. Your supplier Supplied as: FSC 100% Certified TRG: This felling licence is too vague to be of much value on its own but is being used in Name: Pizhou Arser wood Co.,Ltd conjunction with other documents. Address: Fumin Road,Paoche Town,PizhouCity,jiangsu, P.R.China COC NO.: SCS-COC-003910 (Primary Processor)

STEP 5. DOC 5 - LOGS INVOICE(JHHA-PIZHOU ARSER)-1).PDF Commercial Invoices

STEP 8. Document Ref. No.: 37205272 Date: 23/12/2016 Name: Jiangsu High Hope Arser Co Ltd. From: Jiangsu High Hope Arser Co Ltd. Address: 18F,#98,Jianye Road,Nanjing,China To: Pizhou Arser Wood Co Ltd. COC NO.: SCS - COC - 005079 (Brokers without Physical possession) Species: PALAQUIUM, CAMPNOSPERMA, TERMINALIA, CALOPHYLLIUM SPP, Pometia spp； Volume/Quantity: 833.092 Stamped by: State Administration of Taxation STEP 10. Altripan Supplied as: FSC 100% Certified Brand names: FSC PREMIUM ALPHAPLY

32 Environmental Investigation Agency THE LIE BEHIND THE PLY 33 ANNEXES

Annex II: EIA calculations and assumptions for mass balance analysis and for estimate of Arser’s exports of pencil cedar-faced plywood to Europe 1. Mass balance analysis

Assumption Source or references Assumption Source or references

STEP 1. EIA Source: Dan Raymond, the general manager of the FSC Kolombangara STEP 6. References: The same International Plywood catalogue provides the number A maximum of 260 cubic forest. Given that a shipping container of panels per pallet corresponding to panel dimensions, to the right of the meters of pencil cedar logs are pallet can be stacked to a dimensions in parentheses. The number of panels measuring produced by KFPL... Additional reference: According to the FSC Certification Assessment Reports standard height of 900mm,... 2440x1220x15mm that fit on a pallet is given at 60.204 for the certified Kolombangara forest, there is little to no pencil cedar harvested there. Palaquium (pencil cedar) does not appear on the list of the A Chinese plywood supplier website provides an additional supporting 10 species listed as being either the “main” or “additional” plantation species reference below:205 harvested at Kolombangara on any of the audit reports. Moreover, the audit reports repeatedly rule out that much if any harvesting could take place in the natural forest portion of the certified range. The 2015, 2016,and 2017 audit reports all state that “natural forest management (NFM) is not occurring at present,” and “none planned until about 2019/20.”

FSC audit reports are here: https://info.fsc.org/details.php?id=a0240000005sTgVAAU&type=certificate

EIA source: Undercover meetings with Arser company and factory managers ...and sold exclusively to Arser and communication with the general manager of KFPL.

STEP 2. EIA source: The director for International Plywood told EIA that 30% is a Assuming a peeling efficiency realistic figure for peeling efficiency of pencil cedar logs in Chinese mills. of 50 percent, the amount of usable material is 130 cubic Additional references: A survey of eucalyptus peeling mills across China meters. found a recovery rate ranging between 28% and 50%.199

STEP 3. Reference: Testimony submitted to the United States International Trade Peeling the usable material Commission states that most Chinese manufacturers cut their veneers to into face and back veneers at a .3mm or thinner.200 Choosing the thinner end of the range is mathematically thickness of 0.25 millimeters,… more generous to Arser.

Source: EIA, 2017. Investigative material. …for 4x8 (feet) sheets of Reference: Dimensions of 4 x 8 feet (equivalent to 1220 mm x 2440mm) are plywood, the maximum the most common for a sheet of commercial plywood.201 Almost any References: technical specifications from plywood manufacturers (including number of veneer sheets commercial plywood catalogue will offer panels of this size, for example the one appended below). References generally state that a 40-foot “high- produced from 130 cubic pages 6-11 of the catalogue for International Plywood UK.202 cube” (HC) container, the type commonly used for shipping plywood, holds meters is 174,684.132. ...and given that a standard 18-22 pallets.206,207 Choosing 18 is more generous to Arser because the smaller 40-foot shipping container number of pallets per container mathematically yields a larger number of holds about 18 pallets,… containers produced from the KFPL logs. STEP 4. Veneer sheets are applied to the face and back of plywood STEP 7. cores, yielding a maximum of Then each pallet holds 87,342 plywood panels. (900/15=60) 60 panels, and a container filled with 18 pallets holds (60*18=1080) 1080 panels.

STEP 5. Commercial plywood panels come in a variety of thicknesses, ranging Therefore the 87,342 plywood Assume a plywood panel widely between 5mm-40mm, though 5-25 is most common. 15mm is in the panels with face and back thickness of 15 millimeters. middle of the range. pencil cedar veneer will be shipped in (87,342 Reference: Pages 6-11 of International Plywood UK catalogue.203 panels/60=80.9) = 81 containers

34 Environmental Investigation Agency THE LIE BEHIND THE PLY 35 ANNEXES REFERENCES

Annex II: EIA calculations and assumptions for mass balance analysis and for estimate of 1. Karl D. Forth, “Construction, China Demand to Drive Global Plywood Supply of Wood Products in China,” Forest Products Working Paper 1 Arser’s exports of pencil cedar-faced plywood to Europe Growth to 2022 | Woodworking Network,” Woodworking Network, (Rome: Food and Agriculture Organization of the United Nations, 2007), October 24, 2016, http://www.fao.org/tempref/docrep/fao/010/k1978e/k1978e00.pdf. https://www.woodworkingnetwork.com/news/woodworking-industry- 28. Zhang, Lu, and Osamu, “Demand and Supply of Wood Products in 2. Explanation of how EIA estimated Arser’s exports of pencil cedar-faced plywood to Europe news/construction-china-demand-drive-global-plywood-growth-2022. China.” 2. EIA, based on data from Eurostat. “Eurostat - Data Explorer,” accessed 29. Sun, “Forest Products Trade between China and Africa: An Analysis of Information Source Calculation Conclusion January 8, 2021, https://appsso.eurostat.ec.europa.eu/nui/show.do. Import and Export Statistics.” given to EIA 3. Ibid. 30. Yang Hua, “China’s Natural Forest Protection Program: Progress and 4. EU FLEGT Facility and Forest Trends, “Analysis of China’s Trade with Impacts,” The Forestry Chronicle 93, no. 2 (2017): 113–17. the EU and VPA Countries 2010-2019,” government, EU Flegt, June 2020, 31. “Demand and Supply of Tropical Wood Products in China Towards Factory A, which is Meeting with 70 containers/ month = Factory A produces an https://www.euflegt.efi.int/es/publications/analysis-of-china-s-trade- 2020” (Beijing, China: Research Institute of Forestry Information and an Arser supplier, produces Factory A manager 840 containers/year estimated 700 with-the-eu-and-vpa-countries-2010-2019. Policy, Chinese Academy of Forestry (CAF), May 20, 2012). approximately 70 *0.8 -*0.85 (percent of containers of pencil 5. EIA, 2018. Unpublished investigative material. 32. Sun and Canby, “China: Overview of Forest Governance, Markets, and containers of plywood per production for Arser) = cedar-faced plywood 6. September 25, 2020. Email correspondence. Trade.” month. Approximately 80 672 – 714 containers. for Arser’s European 7. SFA (State Forestry Administration), “Case Study on the Plywood 33. Maarit Kallio et al., “China-Europe Forest Bioeconomy: Assessment Industry in China,” China Forestry Development 2004. Beijing: China and Outlook,” From Science to Policy, From Science to Policy (European to 85% of the plywood clients Forestry Publishing House, 2004. Forest Institute, December 2020), https://doi.org/10.36333/fs11. produced is for Arser, all of 8. Xiufang Sun, Liqun Wang, and Zhenbin Gu, “China’s Timber Market 34. “Biennial Review Statistics.” which is exported to System: An Overview” (Forest Trends, 2005), https://www.forest- 35. “A Lawless State: Europe’s Borders Must Close to Trade in Illegal European clients. Most of trends.org/wp- Timber” (Greenpeace, October 2006), https://archivo- the plywood produced in content/uploads/imported/china_timber_market_system_final-5-31-05- es.greenpeace.org/espana/PageFiles/182922/lawless-illegal-timber.pdf. this factory, and all the pdf.pdf. 36. Jessica Lawrence, Noriko Toyoda, and Helvi Lystiani, “Importing products seen in the 9. Analysis from EIA based on ITTO trade data. Destruction” (Rainforest Action Network, 2003), factory for Arser is pencil 10. ARNOLD, R.J., Y.J. XIE, S.J. MIDGLEY, J.Z. LUO, and X.F. CHEN. https://www.salvaleforeste.it/documentazione/RAN_ImportingDestruction.pdf. cedar-faced plywood. “Emergence and Rise of Eucalypt Veneer Production in China.” The 37. Zhang, Lu, and Osamu. International Forestry Review 15, no. 1 (2013): 33–47. 38 Wenbin Huang and Xiufang Sun, “Tropical Hardwood Flows in China: 11. “Biennial Review Statistics,” ITTO International Tropical Timber Case Studies of Rosewood and Okoumé” (Forest Trends, 2013), Organization, accessed January 8, 2021, https://www.forest-trends.org/wp-content/uploads/imported/tropical- Factory B, which is an Meeting with 70,000 cubic meters of Factory B produces at https://www.itto.int/biennal_review/. hardwood-flows-in-china-v12_12_3_2013-pdf.pdf.f Arser supplier, produces Factory B manager standard panels (1.22m x least 666 containers of 12. SFA (State Forestry Administration). 2004. China forestry 39. “China’s High Risk Timber Trade: Lessons from Papua New Guinea” about 70,000 cubic meters 2.44m equivalent to 4-ft pencil cedar-faced development 2004. Beijing: China Forestry Publishing House. (Global Witness, November 2017), of plywood per year. The by 8-ft) stacked to 0.9m plywood for Arser’s 13. “China’s Plywood Is Still Booming,” WBPI Online, March 21, 2005, https://www.globalwitness.org/en/reports/chinas-high-risk-timber-trade- entire production is for would fill approximately European clients https://www.wbpionline.com/features/china-plywood-is-still-booming. lessons-papua-new-guinea-en/. export, and approximately 26,129 pallets. 14. EIA, 2020, based on FAOSTAT database. 40. 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42 Environmental Investigation Agency THE LIE BEHIND THE PLY 43